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SEC votes to expand ‘testing the waters’ proposal to all IPOs

Feb 26, 2019

Move aims to boost number of US IPOs

The SEC has voted for a proposal that gives another benefit of the 2012 Jobs Act to all companies, expanding a so-called testing-the-waters rule to all potential public companies so they can gauge institutional investor interest in advance of an IPO filing.

Currently this is available only to emerging growth companies – those with less than $1 bn in annual revenue. Expanding the rule to a wider range of companies could boost the number of IPOs.

Extending the testing-the-waters stipulation to all issuers will allow companies to communicate with certain institutional investors regarding a potential IPO prior to, or following, the filing of the registration statement with the SEC. It will also offer a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.

These communications with large investors would be exempted from securities law restrictions.

‘Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital – and ultimately provide investors with more opportunities to invest in public companies,’ says SEC chairman Jay Clayton in a statement.

‘I have seen first-hand how the modernization reforms of the Jobs Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.’

The SEC’s comments and responses will become publicly available after the completion of the securities offering but not earlier than 20 business days following the effective date of the registration statement – and if a company changes its mind about the IPO before its registration statement becomes effective, its submission will remain totally confidential.

This proposal in turn aims to deal with an issue Clayton has expressed concerns about: fewer IPOs taking place, with the reduction in the number of US-listed public companies becoming a serious issue.